The Nuts and Bolts of “Closing” on a Purchase or Sale
Whether you’re buying or selling, you’ve probably heard that the finish line is the “closing”. I’ve always thought the term rather non-descript. Even unclear. Is it that the deal between a buyer and seller is done, so the chapter is “closed”? That the parties have agreed to transact with one another until they close the door on one another. Once a property is sold, are we closing the lid on the deal? In this blog, I’ll discuss the steps that lead to a “closing” of a purchase or sale and what exactly is involved in the closing (aka settlement).
Contingencies all satisfied, now what?
Assuming there are contingencies as part of your purchase/sale – i.e., inspection, appraisal, finance contingencies – and those have all been satisfied, you’re now in the part of the transaction that is fairly straightforward. In order to close, there are a few things that have to happen. They are:
- If you’re a buyer, you’ll need to receive what’s called an initial “Closing Disclosure” from your lender at least 3 business days prior to your scheduled closing. The 3-business day period – required under the TILA-RESPA Integrated Disclosure (TRID) rule – is measured in days, not hours, and does not include federal holidays. Note that some lenders consider Saturdays a business day. The “CD” as it’s known is a government-designed document that accomplishes several things: (a) it details the costs a buyer will pay at closing and over the life of a loan, (b) it highlights certain loan terms, (c) it provides contact information for the parties involved in your transaction, and (d) it compares the final costs and a buyer’s pre-paid expenses with a buyer’s loan estimate. A lender will ask a borrower to review and acknowledge the initial CD via their web-based portal. This is a formality, rather than making the document binding, to ensure that borrowers have full disclosures about the rate terms and the cash needed to close. The initial CD is a working document. Hence, it’s possible that it will change over the course of the remaining days prior to closing, though not significantly.
- If you’re a seller, you’ll also receive a CD if the buyer is financing their purchase. There is no 3-business day advance requirement as there is for a buyer. The CD for a seller’s purposes is relatively simple – it details the deed-related costs, realtor commission costs, transfer taxes and any other fees to be charged at closing (e.g., HOA/condo fees owed). As a seller, you’ll typically receive the CD from the title company assigned to your transaction, a day or two before the scheduled closing. This is your opportunity to make sure you are comfortable with the costs and credits that will dictate the amount of money you receive for your sale after the closing.
- As a buyer, you’ll want to receive notification from your lender prior to closing that you are “cleared to close”. This tells you that your loan is fully approved/underwritten and that your lender is prepared to fund your purchase right after closing. If you’ve not received this notice a day or two before closing, you’ll definitely want to circle back with your loan officer.
T-1 (or 2) Before Closing
In the day or two before a scheduled closing, there’s not much if anything for a seller to do. Other than confirm a date/time to sign closing documents. For a buyer, they’ll want to confirm with their lender and/or the title company the amount they need to wire to the title company handling the closing on their behalf. That confirmation sometimes comes in the form of the settlement statement – essentially a restatement of the CD but showing both the buyer and seller’s credits and debits in the transaction.
Note that as a buyer, it’s important that all purchase funds be liquidated well before closing. Last minute scrambles are never fun! One client of mine cashed out stock a day before closing only to learn that their bank wouldn’t release those funds for 2-3 business days. That’s a problem when those same funds need to be wired to the title company the next day for a closing. To avoid any such scramble, plan ahead where funds are coming from and be sure they’re available for wire transmission at least one business day, if not more, before closing. Keep in mind that funds should be transferred via a wire transfer (ACH transfers won’t be accepted).
It’s Closing Time
Sellers have it easy these days. Thanks to Covid-19 and/or an overdue evolution in the way sellers can transfer their property, they can now (generally) sign their closing documents electronically. This typically involves an e-notary and the title company facilitating an electronic closing in the comfort of a seller’s home, phone or office at time of their convenience. A seller can sign closing documents prior to the date on which the closing is scheduled. Those documents include the deed transferring title from a seller to a buyer, an owner’s affidavit (i.e., a seller confirms all contractors are paid, no liens on the property), and several tax disclosures.
A seller’s side of the closing can take as little as 15 minutes. If a seller signs their documents early, the title company will simply hold them in “escrow” until the buyer is done signing. The big thing to note is that it’s highly unlikely that a seller and buyer will meet in person these days. Some may lament the absence of a buyer and seller meeting “at the closing table”. Others will say it’s best to keep the exchange of a property anonymous and impersonal. I can go either away on this. There are certainly efficiencies in the separate document signing exercise. By the same token, I do miss seeing buyers and sellers exchange information with one another, in a sort of passing of the baton exercise.
When it comes to the actual closing, buyers don’t have it as easy as sellers. Lenders still require they apply “wet ink” signatures to loan documents. As a result, buyers are still expected to meet with a title agent on the day of the scheduled closing (not before or after) to apply their John Hancock to a healthy stack of hard copy documents. The most important documents are the Deed of Trust (which will be recorded in the land records of the jurisdiction in which the property is located) and the Promissory Note (kept by the lender on file). The Note is a legally binding agreement that commits you to repayment of the loan after closing.
In most cases, buyers will have received electronic copies of these documents from the title company or lender the night before. Ideally, a buyer should read those documents before heading into the actual closing – that way, they’re armed with questions and knowledge. The closing itself will take as little or much time as a buyer requires. An hour is about the average. I’ve seen them run as long as three hours (that buyer had a lot of questions!) and as short as 20 minutes (perhaps not enough questions were asked there!).
A side bar here. If you’re unable to be physically present at your closing, you may close via an attorney-in-fact. Rather than explore that here, please see my separate blog on this very topic.
Closing is done? Last steps…
Once the buyer is done signing, the assigned settlement agent/title company will bring both the seller and buyer side documents together, verify they have everything and then notify the buyer’s lender of closing completion. A lender must provide loan funds to the title company the same day of closing. However, it’s important to note that, in Virginia, a title company will only release those funds to a seller after the deed has been recorded in the land records of a given jurisdiction. A deed is typically recorded electronically these days, making the process quite a bit faster. That said, the courthouses often close their e-recording in the mid-afternoon. For this reason, I suggest my clients sign documents in the morning of their closing day.
Still with me? If so, here’s one last thing to keep in mind. If a closing is on the last day of the month or in the afternoon on a Friday, expect delays when it comes to deed recordation and funds disbursement. On the last day of the month, the deed might not get recorded until the first day of the month. On a Friday, the deed might not get recorded until the following Monday. Title companies are juggling a lot on those days and sometimes get backed up. If that happens, don’t worry. The title company will get it done within no more than 48 hours – they have to (barring unforeseen circumstances (e.g., power outage, court closure, weather)). There’s a law that requires that!
If you have any questions about the lead up to the closing, the closing process itself or the post-closing elements, please be in touch. I’m always happy to answer questions and talk through how best to navigate the process!